Industries

The composition of the Australian economy has changed markedly since Federation. One of the most striking changes is the decline of the share of output from the agriculture industry, from around a quarter of the economy until 1950 to around 3% only 30 years later.[52] Another major change was that manufacturing output rose to nearly 30% of the economy in 1960 before falling back as international production became more competitive. Over the same period, the services sector grew strongly.

More recently, the industry composition has remained relatively stable, the exception being output from the mining industry, which has increased from a long-term contribution of 5% of the economy in 2005 to 15%, and manufacturing, which has decreased its share by the same amount, around 10 percentage points. The share of output from the health industry has also increased, but to a lesser extent.

There are several implications of these changes for the tax system. Economic activity is taxed through 3 broad avenues: taxes on the inputs to the production process, such as payroll tax; taxes on the income of the agents who generate the activity, which are the owners of businesses (‘capital’) and their employees (‘labour’); and taxes on the products that the businesses produce, such as GST and excise.

Governments in Australia collect around 11% of tax from the inputs to economic production, around 22% from products, and the remainder from labour and capital income.

Three simple examples of how industry composition affects tax illustrate how the composition of the economy can affect tax, now and in the future.

Firstly, mining is an industry with a relatively low reliance on labour compared to capital while manufacturing is much more reliant on labour. As these industries change their shares of the economy, the share of tax will naturally switch between taxes on profits and taxes on wages.

Secondly, the health industry is highly reliant on labour, which may mean that share of taxes from labour income may increase in the future, as the ratio of working age individuals to support each person over 65 continues to decline from around 7.5 in the 1970s to around 5 today. This decline is expected to continue to be 2.7 working age individuals for each individual over the age of 65 by 2050.[53]

Thirdly, exported goods and services are not subject to the GST, and any GST paid on creating those products are refunded. Most of the outputs from the mining industry are exported, so as mining’s share of the economy increases, less GST is raised compared to the same output from another industry.

As the industry evolves overtime, so too will the tax mix.